We’re muddling along cliff’s edge, economist says

Greenlaw, Wieseman win contest for fourth time

WASHINGTON (MarketWatch) — The U.S. economy will probably keep muddling along with 2.25% growth and 8% unemployment for the next year or so, but there’s a great danger that it will fall off the fiscal cliff looming at the end of the year, says economist David Greenlaw of Morgan Stanley, co-winner of the Forecaster of the Month award from MarketWatch.

Greenlaw and his colleague Ted Wieseman won the April contest by having the most accurate forecasts among 45 forecasters across 11 major economic numbers. They had the most accurate forecasts on nonfarm payrolls and the trade deficit, and their forecasts for new-home sales, retail sales and industrial production were among the 10 most accurate.

David Greenlaw and Ted Wieseman
Morgan Stanley

forecast

actual*

ism

52.4%

53.4%

nonfarm payrolls

175,000

120,000

trade gap

-$48bln

-$46bln

retail sales

0.6%

0.8%

housing starts

705,000

654,000

industrial production

-0.1%

0.0%

consumer price index

0.2%

0.3%

durable goods orders

-1.6%

-4.2%

new home sales

330,000

328,000

consumer confidence

70.0

69.2

gdp

2.9

2.2

* Subject to revision

It’s the fourth time the Morgan Stanley economists have won in the eight-year history of the contest, which was established to honor those who do the best job of forecasting the numbers that move markets the most.

The economy is expanding, but “we are very vulnerable to shocks,” such as the fiscal cliff, high energy prices and the continuing danger from Europe, Greenlaw said in an interview.

The recent decline in energy prices is a welcome move, he said, but the drop “isn’t enough by itself to alter the outlook a great deal.” Lower energy prices would provide a “cushion” against negative shocks, but won’t result in much faster growth.

The fiscal cliff refers to the huge increases in taxes and reductions in spending that will occur automatically on Jan. 1 if Congress doesn’t act to prevent them. Greenlaw figures that the automatic changes in fiscal policy would subtract about 5 percentage points from gross domestic product. The only other time in the postwar era that we’ve had a comparable fiscal drag was in 1969, and that led to a short recession in 1970. Read Greenlaw’s analysis on the Morgan Stanley website.

U.S. heading back into recession?

(4:21)

Economic Cycle Research Institute's Lakshman Achuthan on The News Hub discusses why he believes the U.S. economy is heading back into recession in the next several months. (Photo: AFP/Stan Hondastan Honda/AFP/Getty Images)

Most analysts believe Congress will act to prevent the economy from going off the cliff, probably in a lame-duck session after the November election. Greenlaw agrees that a deal will probably be struck in time to scale back the amount of fiscal restraint.

But he also worries that uncertainty about taxes and spending levels could have an impact on the economy before the election. After all, look what happened last summer when the Congress went to the brink of default: Consumer and business confidence was shattered. “The soft patch was no coincidence,” Greenlaw said.

Don’t look for the Federal Reserve to ride to the rescue, he said. Fed chief Ben Bernanke “was unusually clear: Don’t look to the Fed to offset political gridlock.”

“The Fed has resigned itself to slow growth,” Greenlaw said. “There’s not a whole lot more they could do.”

The runners up in the April contest were Steven Ricchiuto of Mizuho Securities, Sherry Cooper’s team at BMO, Jim O’Sullivan formerly of MF Global, and Jan Hatzius’s team at Goldman Sachs.

The median forecasts that MarketWatch publishes in the economic calendar come from the forecasts of the 15 economists who have scored the highest in our contest over the past 12 months, as well as the forecasts of the most recent winner. See our economic calendar and consensus forecast.

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